Section 2.4 Study Guide: Stock Splits and Stock Dividends
Purpose of Stock Splits:
Companies split shares when prices become too high, making trading less accessible.
A stock split adjusts the number of shares and share price without changing total value.
Reverse splits are the opposite — used when share prices fall too low (often into penny-stock range).
1. Stock Dividends:
A stock dividend is when a company issues additional shares instead of cash dividends.
Purpose: Reinvest profits into the business while rewarding shareholders.
Shareholders own more shares, but each share’s value decreases proportionally.
Example:
Investor owns 200 shares at $50 each → total $10,000.
Company issues a 10% stock dividend → 200 × 10% = 20 new shares.
New total: 220 shares.
New cost basis per share: $10,000 ÷ 220 = $45.45 per share.
Total value remains $10,000..
2. Stock Splits:
Forward (regular) split:
Increases number of shares, decreases price per share.
Purpose: Make shares more affordable to investors.
Total market value remains the same.
Can be even (2-for-1, 3-for-1) or uneven (5-for-4, 3-for-2).
Example (2-for-1 split):
Own 100 shares @ $60 = $6,000 total.
After split → 100 × 2 = 200 shares.
New price per share = $6,000 ÷ 200 = $30/share.
Example (5-for-4 split):
Own 100 shares @ $60 = $6,000 total.
New shares: 100 × 5 ÷ 4 = 125 shares.
New price per share = $6,000 ÷ 125 = $48/share.
3. Reverse Stock Split:
Purpose: Raise stock price by reducing number of shares.
Often used to avoid being classified as a penny stock or to meet exchange listing requirements.
Can also be even or uneven.
Example (1-for-4 reverse split):
Own 100 shares @ $5 = $500 total.
New shares: 100 × 1 ÷ 4 = 25 shares.
New price per share = $500 ÷ 25 = $20/share.
Value remains the same ($500).
Splits & Dividends
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Splits & Dividends 〰️
Comparison Table: Stock Dividends vs Stock Splits
Feature / Stock Dividend / Stock Split / Reverse Split
Purpose / Reinvest profits; reward shareholders with more stock / Lower price to make shares affordable / Raise price to avoid penny-stock status
Effect on Shares / Increase in shares (small-scale) / Increase in shares (large-scale) / Decrease in shares
Effect on Share Price / Decreases proportionally / Decreases proportionally / Increases proportionally
Total Market Value / Unchanged / Unchanged / Unchanged
Term / Typically small (e.g., 5–10%) / Even or uneven (2-for-1, 3-for-2, etc.) / Even or uneven (1-for-2, 1-for-4, etc.)
✺ Review questions ✺
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To make shares more affordable and increase market liquidity.
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Forward splits increase share count and lower price; reverse splits reduce share count and raise price.
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The number of shares doubles, and the price per share halves.
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25 shares.
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A stock dividend is when additional shares are issued instead of cash; total value remains the same.
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220 shares (200 + 10% = 220).
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No — total value remains the same; only share count and price per share change.